Despite gold recovering during October 2018 to now be trading at over US$1,227 an ounce, silver remains weak, trapped at well below US$15 per ounce. This — along with the stagnant outlook for the white metal — is having a sharp impact on primary silver miners. While silver has only lost 15% since the start of 2018, miner First Majestic Silver (TSX:FR)(NYSE:AG) has dropped by over 18%, and there are signs of further pain ahead. Now what? First Majestic announced some mixed third-quarter 2018 results, which were not as bad as some pundits expected, despite the miner missing analyst…

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Despite gold recovering during October 2018 to now be trading at over US$1,227 an ounce, silver remains weak, trapped at well below US$15 per ounce. This — along with the stagnant outlook for the white metal — is having a sharp impact on primary silver miners. While silver has only lost 15% since the start of 2018, miner First Majestic Silver (TSX:FR)(NYSE:AG) has dropped by over 18%, and there are signs of further pain ahead.

Now what?

First Majestic announced some mixed third-quarter 2018 results, which were not as bad as some pundits expected, despite the miner missing analyst estimates. Regardless of weaker silver, which saw the miner realize an average price of US$14.66 per silver ounce sold, which was 14% lower year over year, the miner reported a notable improvement in its bottom line.

Net income for the period was US$5.9 million compared to a loss of US$1.3 million for the equivalent period in 2017. That increase can be attributed to higher silver production, which rose by 27% year over year to 3.5 million ounces, while total combined production of silver equivalent ounces shot up by 31% to 6.7 million ounces. The impressive increase in production to a company record can be attributed the purchase of the San Dimas mine as part of the US$320 million Primero Mining Corp. acquisition, which was completed in May 2018. That alone added 3.2 million silver equivalent ounces to First Majestic’s third-quarter production.

This positions First Majestic to meet its 2018 production guidance of 20.5-22.6 million silver equivalent ounces, which, at the upper end of that range, is 40% higher than annual production for 2017. That significant lift in silver and other metals output for the year will help to compensate for sharply weaker silver prices.

First Majestic’s expenses also fell. Cash costs for the third quarter of US$6.85 per silver ounce produced were 16% lower year over year, and all-in sustaining costs (ASICs) fell by 8% quarter over quarter to US$15.12 per silver ounce produced, which was also 2% less than the same period in 2017. While AISCs were higher than the average price per ounce of silver realized by First Majestic for the quarter, this indicates that the miner’s profitability is growing.

First Majestic has also reduced capital expenditures by 23% compared to its initial budget because of sharply weaker silver. This should lead to further improvement in AISCs and boost its profitability in the current difficult operating environment.

One of the most notable improvements reported by First Majestic was a significant improvement in the ore grades mined. For the third quarter, the average silver grade was 152 grams of metal per tonne of ore mined (g/t) compared to 127 g/t for the previous quarter and 131 g/t a year earlier. This is a key reason for the reduction in operational costs. First Majestic expects ore grades to keep rising because of infrastructure enhancements at its mines, notably San Dimas, as well as improved engineering and process planning. For these reasons, the miner should be able to meet its revised 2018 cost guidance of US$6.63-7.54 for cash costs and AISCs of US$13.28-14.84, albeit at the upper end of those ranges.

So what?

The outlook for silver remains stagnant with little upside ahead for the foreseeable future, and that is despite the gold-to-silver ratio having widened to 84 ounces of silver to buy one gold ounce. While this does make primary silver miners in general unappealing investments, First Majestic’s third-quarter results show a marked improvement in its operations since the start of 2018. The operational progress, however, does not appear to be enough to make the miner an appealing investment, particularly when its AISCs are still higher than the spot price for silver.

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